What is Reverse Mortgage ?
Simple! Reverse Mortgage is the exact opposite of a Home Loan. Anyone, who has a fully owned House can get a loan. The way, this works, is that his loan money will be divided in chunks (EMI’s) over many years and given to him every month. This can easily act as Monthly income. At the end of the loan tenure, the Bank stops paying the monthly income. If one of the spouses dies, the other can still continue living in the house. If both die, the bank gives their heirs two options – settle the overall outstanding loan and retain the house or, the bank will sell the house, use the proceeds to settle the outstanding loan and give the rest to the heirs. For people who don’t know – “Mortgage” means “Loan” 
How is the loan paid ?
With a reverse home mortgage, no payments are made during the life of the borrower(s). Which means the loan has to be paid only after both the borrower and spouse die. Since no payments are made during the term of the reverse home mortgage loan, the loan balance rises over time. In most areas, where the appreciation is good, the value of the home grows at a much faster rate than the loan balance. Therefore, the remaining equity continues to grow.
When both, the borrower and spouse pass away, the ownership of the home is then passed to the estate or directed by a living will or will to the beneficiaries. The beneficiaries now own the home and have to sell the home or pay off the loan. If the home is sold, the reverse home mortgage lender is paid off and the beneficiaries keep the remains. Read about Real Estate returns over last 10 yrs .
Example :
Mr Ajay is around 62 yrs old, and his wife is 60 yrs old, they live and own a house in Karvenagar, Pune which is worth Rs 1 crore now . They have a daughter and son who are their legal heirs (50:50) . The old aged Ajay and his wife do not have a monthly income source, so they decide to go in for a Reverse Mortgage loan. The Bank is ready to loan upto 60 lacs to them, which means they will be paid Rs 35k per month for next 15 yrs (just an example.)
Now, they start getting monthly income of 35k per month for next 15 yrs, & they continue to live in the same home. After this point, their children support them financially and then Ajay dies at age 79. After this, his wife still continues to live in the house. Sadly she too, passes away at age 85. By this time the total loan outstanding becomes Rs 1.1 crores (It was 60 lacs at the end of 15 yrs, but after that, it starts growing.)
Now the loan has to be paid off. The son and daughter does not have money to pay to the bank, so the bank decides to sell off the property. At that time, the price of the house is Rs. 3 crores. The bank sells the house and get total 3 crores, out of which 1.1 crores is taken by the bank and rest is paid to legal heirs, which they split amongst themselves. Look at EMI Calculator
Which Banks Offer Reverse Mortgage ?
- National Housing Bank (NHB)
- Dewan Housing Finance Limited (DHFL)
- State Bank of India (SBI)
- Punjab National Bank (PNB)
- Indian Bank
- Central Bank of India
- LlC Housing Finance
- Andhra Bank
- Corporation Bank
- Canara Bank.
Tip from Hemant : “Star Union Dai-ichi offers annuity cover with reverse mortgage . When a person approaches the bank for a reverse mortgage loan on house property, the bank, after assessing the value of the property and sanctioning the loan, will approach the insurer and buy an annuity plan for the borrower. The annuity will be passed on to the borrower’s account on a monthly, quarterly or annual basis. The installments will depend on the purchase price, age and whether the insured person opts for a lower or higher lifetime annuity. “
Important Points in Reverse Mortgage
- Reverse Mortgage is available to Senior Citizens only. Any house owner over 60 years of age is eligible for a reverse mortgage. If wife is a co-applicant, she should be above 58.
- The maximum loan is up to 60 per cent of the value of the residential property subject to maximum of Rs 50 Lacs.
- The maximum period of property mortgage is 15 years with a bank or a HFC (housing finance company.) Minimum tenure will be 10 years. Some banks like Punjab National Bank offer RML for 20 years also.
- The borrower can opt for monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
- The revaluation of the property has to be undertaken by the bank or HFC once every 5 years.
- The amount received through reverse mortgage is considered as loan and not income; hence the same will not attract any tax liability. How to do last moment Tax Planning ?
- Reverse mortgage rates will vary according to market conditions depending on the wheather borrower has choosen Fixed or Floating interest rate.
- Processing fee for the loan would be between 0.15 per cent and 1.50 per cent of the loan amount.
- One can prepay the loan along with the interest any time during the loan tenure. Typically, there is no pre-payment penalty.
How do I apply for Reverse Mortgage?
- Decide to pledge your house for reverse mortgage.
- Go to the branch of the bank, who you have a banking relationship with, and provides Reverse Mortgage
- Fill up the necessary form, the bank offers for reverse mortgage
- You need to furnish your personal and financial details like: the property, your legal heirs, and so on.
- Proof of ownership; you will also need to furnish property papers and a proof that the house that you are pledging is your residence.
When to consider taking Reverse Mortgage ?
Even though Reverse Mortgage seems like a nice idea, it should not be the primary tool to fund one’s retirement expenses. It shouldn’t be used to fund the shortfall in the retirement income if any. A valid reason can be – if one does not have any legal heirs or leaving money to/for them after death, is not high priority. There are many old people who have assets of high worth, but they do not have a proper, steady stream of income. One can use reverse mortgage in that case. In India, Reverse mortgage isn’t very popular yet, because of bad/negligible marketing and our mentality, where we dont take loan on our most valuable and most emotional asset “Home” Another reason could also be that there are old / aged people who own 100% of home and are living alone with spouse are few & far between. These products might become very popular in coming decades .
Comments? What do you feel about Reverse Mortgage Products? Do you think it’ll become more popular & successful in the coming decades?
{ 31 comments… read them below or add one }
Superb!!
It will definitely clear the doubts/myths from the mind of various readers.
Flow chart is AMAZING.
If you would like you can add this aspect:
“Star Union Dai-ichi offers annuity cover with reverse mortgage
When a person approaches the bank for a reverse mortgage loan on house property, the bank, after assessing the value of the property and sanctioning the loan, will approach the insurer and buy an annuity plan for the borrower. The annuity will be passed on to the borrower’s account on a monthly, quarterly or annual basis. The installments will depend on the purchase price, age and whether the insured person opts for a lower or higher lifetime annuity. “
Hemant
thanks , I added your tip in the article .
Manish
Let me bookmark it… I will use it when I am 60
Ajay
Hmm . may be you want to send this article to all your friends whose parents can use this information .
Manish
In the above examples, it is said that the value of the house once given for reverse mortgage is going to appreciate. is it 100% necessary that the rates/prices of the house are going to increase and not decrease. Also, what if the outstanding loan amount is greater than the price received from selling/auctioning of the property (after the senior citizen dies and he has not legal heir)?
Dolly
Thats the risk Bank takes if they want to make money out of loan , Reverse Mortgage is a long term affair and over 10-15 yrs the prices are expected to increase only , dont you think so ?
Manish
Great Article!
In my view Reverse Mortgage will slowly catch Up and will become an important toll for retirement.The only Factor because of which investors do not consider it is Unawareness,Once more companies come in the reach will increase and so the awareness.And not to forget Financial Planners will play a big role in thsi-reason you don’t have many agents to market it.
Jitendra
Yup , Apart from unawareness I think another reason is that there is small section of people who are above 60 and own a house in big cities . what do you say ?
Manish
Informative article Manish.
Reverse Mortgage is still in it’s infancy in India. One of the issues with RM could be that a lot of parents transfer the rights to thier house / property to their children quite early in life and do not hold on to the property / house till they die. The parents should be educated / encouraged not to transfer the property to their children or atleast hold onto one house till their death so the parent(s) can opt for reverse mortgage if required especially if the children are not supporting them financially.
Venshu
Venshu
Yes , the emotional reasons can be in abundance , apart from psychological issues like “Ghar mera mandir” and pressure from children .
Manish
Good article ……….. Explanation is soo simple dat even Novice can understand i had read some articles on reverse Mortgage earlier also but they were bit confusing Its very simple article
Manish
Nice to hear that . Forward the article to more people you know
Manish
Dear Manish,
Kindly advice on Nabard Bhavisha Nirman Bonds ? are they buy for long term.
Regards
Pratik
Pratik
I have no idea on these as of now , please ask unrelated question in email , not on comments section .
Manish
@ Prateek
These are 10 year Zero Coupon Bond. (Will be listed on exchange for trading)
You need to invest Rs 9500(face value) a bond & maturity will be Rs 20000 per bond. Pre-tax yield comes out to be 7.7%. But being a zero coupon bond tax will not be on interest but will be like capital gain with benefit of indexation. (App. after tax yield 7.22%)
Some time back these bond were available at face value of Rs 8500.
Still have some query, feel free to ask.
Hemant
Thanks for the clarification .
Manish
Hi Manish,
Thaks for the details of RM. I have one query in Ajay’s example the total RM amount was 60lacs as 60% of 1 crore.But you did mentioned that at the end of 15 yrs the amount would be 1.1 crores, how you have calculated this??
Thaks & Regards
Rupali
Rupali
60 lacs will be due just after the loan tenure of 15 yrs get over . After that the interest will be applicable and when both borrower and spouse die, the actual loan amount will be higher . If you look closely its 1.1 crores when the spouse passes away . This 1.1 crores is just a random figure I have taken for simplicity , it will be higher or lower depending on the interest rate .
“Sadly she too, passes away at age 85. By this time the total loan outstanding becomes Rs 1.1 crores (It was 60 lacs at the end of 15 yrs, but after that, it starts growing.)” .
Manish
Thanks Manish,
So that is the interest component you are talking about, once both both borrower and spouse die it starts growing with interest component.
60lacs+Interest= total outstanding. Got it. Thanks
Nice to see these financial innovations of the western countries (US?) slowly make their mark in India. You have covered most of the technicalities involved in a Reverse Mortgage. Reverse mortgaging seems to be a good way to convert a fixed asset into positive liquid cashflow.
I am totally with you suggest this *should not* be a part of *retirement plan*. Sure these schemes will be in vogue in coupe decades when the current asset rich cash poor generation reaches retirement age. This may be in some cases their only saving grace.
Pardon me if I’m going offtrack, a proper Financial plan shouldn’t end at self and spouse. I’ve noticed most run of the mill financial plans end with ones (including the spouse) retirement goals. While it may serve its purpose, I believe a financial plan should be farsighted enough to consider the needs ones next generation. If one takes a look around, families that have been affluent for generations have managed to stay affluent (despite the third generation jinx) because their older generation planned not just for their children but grand children, in some cases great grand children too!
Coming to Reverse mortgage – this is a product best suited for broken American culture, where the (most) kids do not support their parents in their old age, and their parents do not have a healthy cash flow during retirement. I hope Indian family tradition is not broke enough to make schemes like these a part of retirement planning yet
Ash
What you say is correct . Indian Families should not go that way , we should be with our tradition , but still there is a class of citizens who are Asset rich class , but no income to support , their children are working out of their city and hence in those cases sometimes it may make sense to go for these products .
Regarding your Next generation planning point, I agree to it, A good financial planner always takes into account if a client want to leave some inheritance asset or amount and accordingly plan for it .
Manish
There two vital points which need to be considered in this scheme.
1. Inflation accounting has not been considered. At ~10% actual inflation(not Govt figures) per annum, the ‘monthly income’ from reverse mortgage 35K, will progressively diminish in “Purchasing power’ to half in the next 7~8 years(Einstein’s eighth wonder, ‘power of compounding’ works negatively). The correct way is to organise a ‘inflation adjusted’ ‘monthly income’ for constant PPP(Purchasing power parity)
2. Many of the properties will appreciate in value, over the years. There is a clause for revaluation of property after X years & corresponding improvement in ‘monthly income’. This helps to offset inflation.
Ajit
thanks for your additional information . Reverse Mortgage is hence the last option one should opt for as far as I understand .
Manish
Hi Manish,
Reverse Mortgage is a good platform for Senior Citizens when it come to earning monthly income.But progress has been slow in comparison to what was expected.The reason is annuity. If you look at annuity based products like pension plan then you don’t feel very comfortable.What do you feel?Insurance companies in tie up with banks will be able to design a better product.
Jitendra
The problem I see here is 2 things
1. Awareness about the RM product , it would progress well if more and more people know about it
2. In India , its unlikely that houses are owned by Senior citizens and even if they have it , its very old one which does not get considered for RM as a house can not be older than X years as per the RM rules . Most of the new housed are owned by 30-40 yrs old who are again not eligible
A Lot of restructuring is required in the product to make it success . It has to come in smaller cities for sure
Manish
Hi Manish …seeking a clarification…one of my known has applied for reverse mortgage with SBI for rs 20 lacs against a property of worth Rs 1.20 cr , but sbi says they shall sanction rs 80 lacs and disburse only 20 lacs. Also some one from sbi told them that if some thing happens to applicant the sanctioned amount is to be payed back. Dont think that sanctioned amt shd be payed back…what do you say…
Manish
May be they will disburse it in parts ? Did you clariify ?
Manish
hello,
excellent detailing of RM. it has cleared almost all my doubts, will you please mind answering few of my queries ?
my uncle is 62 years old and he owns a house valuing above 1 crore. he needs about 20 lacs immediately to pay some bank debts. he is planing to sell off one of his floors in order to pay the debts.
I want to know :
1) what is the procedure for reverse mortgage ?
2) how safe it is ?
3) how fast can he get this loan ?
4) can he rent his house afterwards or not ?
5) can he get 20 lacs and then monthly income too ?
or just 20 lacs against the house and then be happy with his regular house rent ?
i dont want him to sell of his property at this age so thought of reverse mortage.
please answer with all pros and cons if possible i will be really grateful Manish.
thank you.
Manish,
Thaks for the explanation , however 1 question.
The house is in my Dad’s name , he passed away in 2004 , now Mom & me are the legal heir , as I am the only child. Can at any point my mom go for RML with me as co applicant so that I may pay off the loan with in time and not wait till it becomes a ICE BALL.
I mean she need not not take money from me but take RML and i pay the amount like EMI, is this possible.
Thanks
Sudha
Sudha
You dont pay any EMI in case of a reverse mortgage .. Its opposite of a loan.. here you pledge your house and get the income out of it , but at the end of the peroid the bank will either take the house , or it will ask the legal hiers (in this case YOU) , to pay teh loan amount and take the house . Also note that your mother can apply for RML only if the house is on her name and the house is not too old .
Manish
Sudha
Again .. there is nothing like PAYING EMI in RML , its not a loan , its a reverse of the loan where bank has taken your house as LOAN from you and pays you the income (see it as bank paying EMI) and then once the tenure passes like 15-20 yrs , now the bank will ask your to pay the LOAN the end in lumpsum (not in parts) and then if you can pay off that big sum, then you take the house ,else it will go to BANK , so here there is nothing like PAYING EMI .
Also, I am not sure if you can jointly go for Reverse mortgage because its only for old people. better you contact the banks which provide reverse mortgage and then talk to them about what can be done .
Can you tell me that what is your situation and what exactly you guys want. Lets see how we can achieve it ? Do you want to generate a regular income for your mother but dont have a LUMPSUM money ? Is that the case ?
Manish